Barney Frank: “Fed Has Lost Some Purity”

As most of you know, I’m becoming a bit of a bore when it comes to the subject of Fed independence. So, fair warning, here’s another little post on the subject.

My favorite congressman, Barney Frank, had some hearings today on the future of financial regulation. Afterwards, he offered his opinion that the Fed should become the chief systemic credit regulator. No problems necessarily with that. What did cause me to do a double take was some of the logic he employed in getting to this point.

“It’s a little late to worry about the absolutely purity…and the Fed, given the role they have played with the TALF and the TALC and whatever,” he said at a press conference. “And I don’t think there’s any necessary compromise there. The Fed’s played a very active role in intervention in the economy. A more active role than I think you would expect them to do with regulation, that does not appear to have impinged upon their monetary policy… Someone has to be the systemic risk regulator.”

It seems as if Barney is saying that the Fed has lost its virginity but that doesn’t really mean it’s been compromised. I can’t quite follow his logic. Either you have lost it or you haven’t, you can’t really be in between. But it doesn’t really make any difference because as far as he can see the fact they came over to the dark side doesn’t seem to have impinged on their monetary policy.

Of course, we won’t know if it has or hasn’t impinged on their monetary policy or just about anything else they are charged with doing until they have to do something that Barney Frank and his brethren don’t like. Say, like raising rates when a recovery finally comes about. When Bernanke has to choke off growth when inflation starts roaring we shall see if he still calls the shots.

Sorry for the continuing rant but this just might be important someday.


Just one more thought on this and it has nothing at all to do with the Fed’s independence. Congressman Frank also outlined his thoughts on the key elements of regulation. Here they are:

Rep. Frank said systemic risk regulation should include at least four key elements:

1) Prevent companies from making loans that are 100% securitized, so that some risk remains with the originator.

2) Curtail excessive leverage at institutions.

3) The ability to resolve huge failed nonbanks, such as bank holding companies and insurance companies.

4) Prevent perverse incentives for excessive risk taking in executive compensation

I’m sure I’ll discuss all these and more in the coming months. But for now point four makes my blood boil. I will concede to him the power to beat people up about compensation so long as the government is supporting them. I will not agree that the government’s regulatory authority absent financial support can or should in any manner include the ability to dictate compensation. That isn’t regulation it’s control and that, my friends, is just socialism wrapped in nice paper.



more: here (WSJ) and here (previous post on the subject with links)

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